Budget reform must start with what's feasible

Every year, the national budget contains some good initiatives. There are proposals for investment incentives, support for new sectors, a larger development programme, better allocations for education and healthcare, and measures aimed at easing pressure on people. Some of these are welcome while some are overdue. The question, however, is not whether the budget has good intentions. The more relevant question is whether the budget has identified the right policy instruments to deal with the difficult economic situation Bangladesh is now facing.

There are at least five major challenges facing the economy today: high inflation, weak revenue mobilisation, pressure from debt servicing, a fragile banking sector, and stagnant private investment. These are not new problems; they have been accumulating for years. What is worrying is that the space for policy mistakes has narrowed considerably. A budget can no longer rely on ambitious targets and hope that economic growth will solve the rest. That approach has served us poorly. The budget now needs to be judged by a stricter test: does it provide a realistic route to restore macroeconomic stability while protecting ordinary people?

The first area that needs a serious rethink is revenue. Bangladesh’s tax-GDP ratio has remained one of the lowest in the region for a long time. Each year, a high revenue target is set and each year, the actual collection falls short. This has become almost routine. The proposed FY2026-27 budget again depends on a large increase in revenue collection, but there is no convincing explanation of why this year will be fundamentally different. Digitalisation, risk-based audit, broadening the tax net, and reducing exemptions are necessary steps. But these reforms take time. They require institutional capacity, political backing, better taxpayer services, and a reduction in arbitrary behaviour by the tax administration.

Therefore, instead of setting an overly ambitious target, the government should prepare a more realistic revenue framework. It should separate what can be collected under the existing system from what may come through new reforms. It should also publish a transparent tax expenditure statement. The budget gives several incentives to renewable energy, electric vehicles, semiconductors, electronics, logistics, startups, SMEs, and regional investment. Some of these incentives may be justified. But the government must show how much revenue is being forgone, who is benefitting, and what outcomes are expected. Without such transparency, tax incentives may become another form of privilege.

The second reform should be in the way the tax net is expanded. There is a real need to bring more people and businesses under the formal tax system. But the easiest taxpayers are not necessarily the right taxpayers. Small traders, retailers, wholesalers, and middle-income professionals are often more visible than wealthy tax evaders. If the tax drive falls mainly on these groups, it will create resentment without improving tax justice. The government should concentrate more on large taxpayers, high-income professionals, property transactions, underreported business income, and sectors where evasion is widely suspected. VAT procedures for small businesses should be simplified, not made more intimidating.

The third area is debt and public expenditure. Debt servicing has already become a heavy burden on the budget. If interest payments continue to rise, less money will be available for education, health, social protection, and productive infrastructure. This is why the government must become much more selective about borrowing. Not all projects deserve debt financing. Projects should be screened on the basis of economic returns, employment potential, readiness, and foreign exchange implications. Large projects with weak feasibility, inflated costs, or uncertain benefits should be postponed. This is basic fiscal responsibility.

The Annual Development Programme (ADP) also needs to be treated differently. A bigger ADP may sound encouraging, but a large allocation alone means little if projects are not ready, land is not available, procurement is delayed, and implementation capacity remains weak. The government should create a shorter priority list of projects that can realistically be implemented within the year. Unapproved or poorly prepared projects should not receive large symbolic allocations. There should be quarterly reporting on physical progress, cost revisions, and reasons for delay. Without this discipline, ADP expansion will again become an accounting exercise rather than a development strategy.

The fourth reform is in education and health. These two sectors are usually praised in budget speeches, but the real test is very different. In education, the question is whether students are learning. In health, the question is whether households are spending less out of their own pockets for basic services. Higher allocations are welcome, but they will not automatically improve outcomes. The government should publish school-level learning indicators, track teacher attendance, strengthen technical education, and link financing to learning recovery. In health, public money should be tied to medicine availability, doctor and nurse presence, primary care quality, and functioning referral systems. Otherwise, allocations will increase while people continue to pay privately for weak public services.

The fifth and perhaps hardest area is the banking sector. The proposed budget acknowledges the stress in the sector and proposes reforms. But the real question is whether the government is willing to confront powerful interests. Recapitalisation may be needed for some banks, but public money should not be used without accountability. Before recapitalisation, there should be credible audits, changes in bank governance, recovery plans for bad assets, and visible action against wilful defaulters. If weak banks are rescued without changing the behaviour that created the weakness, the problems will return. Meanwhile, government borrowing from the banking system must be contained so that private investment is not crowded out.

Energy policy also needs a more practical reform path. Bangladesh cannot reduce import dependency overnight. But it can reduce vulnerability. Strategic fuel stocks, diversified import sources, domestic gas exploration, energy efficiency in industry, and grid readiness for renewable energy should be given clear annual targets. Price adjustment may sometimes be unavoidable, but it should be gradual and predictable. Sudden increases in power, gas and/or fuel prices will hurt both households and industries. If energy prices rise without efficiency gains and supply reliability, inflation will rise and competitiveness will weaken.

Finally, employment must be brought to the centre of the budget. Startups, freelancing, creative industries, and ICT services are useful, but they cannot absorb the whole pressure of youth unemployment. Bangladesh needs labour-intensive manufacturing, agro-processing, logistics, local services, and apprenticeships linked to real firms. Employment exchanges will help only if they are connected to actual vacancies and training programmes. Otherwise, they will become another administrative platform with little impact.

The FY2026-27 budget has many promises. What Bangladesh needs now is a smaller list of reforms that are actually implemented: realistic revenue targets; transparent incentives; fair taxation; disciplined borrowing; selective ADP implementation; outcome-based social spending; accountable bank reform; predictable energy policy; and job-linked investment support. None of these is impossible, but all require political will. The biggest reform may, therefore, be simple: stop using the budget as a document of aspirations, and start using it as a document of hard choices.

Dr Selim Raihan is professor of economics at Dhaka University and executive director at the South Asian Network on Economic Modeling (Sanem). He can be reached at selim.raihan@gmail.com.

Views expressed in this article are the author's own. 

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